After more than 26 years practicing elder law in New Jersey, I have noticed that misconceptions tend to arrive in waves. The same misunderstanding will surface from multiple clients in a short span of time, often with near-identical wording. Recently, a new wave has arrived. A number of clients have told me they want to place their home into an irrevocable trust specifically so it will receive a step-up in basis at death meaning their children will owe little or no capital gains tax when they eventually sell the house. Interestingly, not long before that, I heard the opposite misconception just as frequently: clients refusing to put their home into a trust because they believed it would lose the step-up benefit. Both versions are wrong — and both can lead to costly mistakes.

What Is a Step-Up in Basis?

When you sell an asset, the IRS taxes the gain — the difference between what you paid for it (your basis) and for what you sell it. A step-up in basis is one of the most valuable tax benefits in the entire tax code: when you inherit an asset, your basis is automatically stepped up to the fair market value on the date of the original owner’s death. The appreciation that built up during the decedent’s lifetime simply disappears from a tax perspective.

Here is a straightforward example. Suppose your parents purchased their home in 1985 for $100,000. Today that house is worth $500,000. If your parents sold it during their lifetimes, they would generally owe capital gains tax on $400,000 of gain. But if they pass away still owning the home and you inherit it, your basis becomes $500,000, the value at the date of death. If you then sell it for $500,000, you owe nothing in capital gains tax. That $400,000 of gain is permanently forgiven.

The Misconception: You Must Use an Irrevocable Trust

Here is the heart of the matter: a step-up in basis has nothing to do with whether your house is in a trust. If you simply own your home outright or in a revocable living trust when you die, your heirs receive the full step-up in basis automatically. You do not need to transfer it to an irrevocable trust to achieve that result.

In fact, rushing to place a home into a poorly drafted irrevocable trust can destroy the step-up benefit. Whether an asset held in an irrevocable trust receives a step-up depends entirely on how the trust is written, specifically, whether the IRS will treat the trust’s assets as part of the grantor’s taxable estate.

The Good News: You Can Have It Both Ways

Many of my clients want to accomplish two goals simultaneously: protect the family home from being consumed by nursing home costs under Medicaid’s asset rules and preserve the step-up in basis for their children. The good news is that both goals are achievable but only with an irrevocable trust that is carefully and correctly drafted. When structured properly, an irrevocable Medicaid Asset Protection Trust can remove your home from your countable assets for Medicaid eligibility purposes — shielding it from the nursing home — while still ensuring that the home retains its step-up in basis at death. The IRS and Medicaid rules operate on different tracks, and a knowledgeable elder law attorney knows how to navigate both simultaneously.

The Bottom Line

Do not make changes to how your home is titled based on a conversation at the kitchen table, an article shared on social media, or advice from a well-meaning friend. If you have heard that an irrevocable trust is the key to a step-up in basis, or that a trust will cost your family that benefit, please speak with a qualified New Jersey elder law attorney before taking any action.